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Apria's Last Gasps?

Apria looks to rebuild its growth, but may instead decide to sell out.

Here's one way to look at home health-care providers like Apria Healthcare(NYSE:AHG) and Lincare(NASDAQ:LNCR). Basically, they're in a partnership with the government (specifically, with Medicare/Medicaid), but it's not an equal partnership. When the government decides that these companies are making a bit too much money, it clamps down on reimbursement.

This in turn forces the companies to get more creative about cost-cutting and continue to seek out synergistic buyouts of smaller players. Eventually their profits rise again and the government again begins to ponder reimbursement cuts. That's an admittedly simplistic view, but the point is that reimbursement changes are just a periodic part of the business.

That said, it looks like Apria may have had enough. It announced that it has retained Morgan Stanley to help facilitate a potential acquisition of the company. Prospective buyers are apparently welcome to make an offer, and if a bid looks appealing enough, management would expect a deal to close before year-end.

Results for the second quarter, though, suggest that Apria isn't doomed if it doesn't get an attractive enough offer. Revenues were up about 4% as the company continues to digest recent reimbursement cuts. Margins also suffered and the company posted a 20% drop in operating income. I'll grant that those aren't great numbers, but they're not going-out-of-business numbers either.

During the quarter, Apria completed an additional seven acquisitions for $67 million. That's typical for this serial acquirer and typical for the industry as a whole -- it is an extremely fragmented business and there are numerous mom-and-pop operations that can be easily tucked into a larger company like Apria or Lincare.

These are somewhat ugly times for the industry, but Apria has been here before. What's more, management has been diligent about maintaining price and profit discipline and has also looked to expand the business (launching a diabetes supply operation, for instance). To me, that means that current times are more likely a recharging period as opposed to a permanent change in the business.

I wouldn't dismiss the possibility that Apria will succeed in finding a buyer if it is really serious about selling out. While this type of business might not be ideally suited for a publicly traded company, I would expect many private equity groups to be interested at the right price. Even if the company doesn't sell, though, investors could still be rewarded as long as they're willing to hang on and wait for the company to adjust to the new reimbursement realities.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (thatmeanshe's neither long nor short the shares).